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Indian Monetary Policy: Policy Stances and Important Observations

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Indian Monetary Policy: Policy Stances and Important Observations!

Monetary policy in India has to be designed and pursued in the context of planning in the mixed economy’ where the main object is to accelerate the process of economic growth with stability and social justice.

The Policy Stances:

The monetary policy stances during the course of planning in India (1951-1987) may be stated as follows.

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1. During the First Five-Year Plan period (1951- 56), the role of monetary policy was confined to the allocation of resources in conformity with the plan objectives. Initially in 1951 to contain inflationary pressures, the RBI raised the bank rate from 3 per cent to 3.5 per cent in November 1951.

2. During the Second Plan period (1956-61), the policy was more or less anti-inflationary. The bank rate was raised further to 4 per cent in May 1957 and the selective credit control scheme was introduced in May 1956.

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3. During the period of the Third Plan (1961-66) and Annual Plans (1966-69), the RBI adopted a credit policy of restraint. It raised the bank rate further to 4.5 per cent in January 1963, to 5.0 per cent in October 1964 and again to 6.0 per cent in March 1965. The Credit Authorisation Scheme was introduced. In 1964, a system of differential interest rates (DIR) was also introduced. The SLR was raised from 20 per cent to 25 per cent.

In 1969, the Government of India nationalised the major commercial banks, thereby bringing nearly 85 per cent of the banking activity in the hands of the public sector.

4. During the Fourth Plan (1969-74) period, the restrictive credit control measures were adopted very sharply. The Net Liquidity Ratio (NLR) was stipulated from 31 per cent to 34 per cent between April 1970 and January 1971. The SLR was enhanced to 30 per cent and NLR further to 37 per cent by March 1973. The Bank rate was raised to 7 per cent and CRR to 5 per cent in May 1973. In September 1973, CRR was raised further to 7 per cent.

5. During the Fifth Plan (1974-79) period, the policy had remained basically anti-inflationary.

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6. During the Sixth Plan period (1980-85), efforts have been continuously directed towards containing the inflationary pressures. In 1981-82, the SLR was raised from 34 per cent to 35 per cent. It was further raised to 36 per cent in September 1984 and again to 37 per cent in July 1985. The selective credit controls were rationalised and simplified.

Important Observations:

Reviewing the course of monetary policy in India, we may make a few observations as under:

1. The Reserve Bank of India tried to use a number of traditional as well as non-traditional (innovative) monetary measures in the course of its monetary management.

2. However, all the instruments of credit have not been boldly and adequately used for achieving the goal of price and economic stability.

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3. By and large, the monetary policy in India has remained anti-inflationary, but without much success in achieving its goal. As an anti-inflationary device, however, the monetary policy in India has not only acted through the availability of credit but has also adjusted the cost of credit upwards, from time to time.

4. As Dr. Rangarajan, the Deputy Governor of the RBI, observes, during the last 35 years, monetary policy measures in India have generally been a response to fiscal policy and action. The monetary policy has been essentially direct towards facilitating Government finances and public debt management.

5. In the seventies and eighties, the RBI’s monetary policy concentrated more on the distributional aspect rather than on the level of total credit in the banking system. The scope of monetary policy has, therefore, been extended from a mere regulation of money supply to the distribution of credit in favour of priority sectors.

Recently, the Chakravarty Committee has recommended a scheme of flexible monetary targeting as a device for the regulation of money supply in the economy.

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Monetary policy alone cannot deliver the goods in a planned economy like that of India. There is an urgent need for a healthy and pragmatic co-ordination between monetary and fiscal policies in the context of economic planning of the country.

Indeed, the Reserve Bank is trying hard to formulate and implement a sound and effective monetary policy for the Indian economy. However, it has achieved limited success because of lack of co-ordination between the organised and unorganised sectors of the money market in the country, and due to the absence of financial harmony between fiscal and monetary policies of the country.

Thus, quite often, a good aspect of monetary policy is ruined because of a wrong central fiscal policy. For instance, in recent years, monetary authorities are trying to curtail money supply and bring down the forces of inflationary pressure on the economy, but the budgetary authorities continue to resort to deficit financing indefinitely, thereby rendering the efforts of the Reserve Bank futile. Thus, what is wanted in India, at present, is co-ordinated and harmonious monetary and fiscal policies in the pursuit of general economic goals.